Ben & Jerry's Frozen Fist: The Ice Cream Oligopoly

How do real life oligopolies coordinate? One particularly interesting (and delicious) case is in the market for high-quality ice cream. A 2020 paper by Christopher Sullivan documented the coordination.

The high-quality ice cream market is dominated by two companies: Ben & Jerry's and Haagen-Daz. These two companies both product high-quality ice cream, but they produce very different types of flavors.  Ben & Jerry's produces fun, "chunky" flavors with lots of non-ice cream ingredients (called "mix-ins") such as Phish Food, Chunky Monkey, and Cherry Garcia. On the other hand, Haagen-Daz produces classic, "smooth" flavors without many mix-ins such as vanilla and chocolate.

While this division may seem arbitrary, it is actually an example of an oligopoly colluding to split a market and earn monopoly profits.  For example, in 2013, 28.2% of Haagen-Daz ice cream sales in American supermarkets were of the classic flavors vanilla, chocolate, coffee, strawberry, and butter pecan. However, Ben & Jerry's did not offer any of those flavors in supermarkets even though Ben & Jerry's produced all of them and used them as the base of their fun, "chunky" flavors. You could even buy all those flavors in Ben & Jerry's ice cream stores!

Why didn't Ben & Jerry's sell classic flavors? They were implicitly colluding the Haagen-Daz.  The deal was Ben & Jerry's would stay out of the "smooth" ice cream market if Haagen-Daz stayed out of the "crunchy" ice cream market. This allowed both firms to charge prices as though they had a monopoly on high-quality ice cream.

How did this implicit collusion work? Well, in 1992, Haagen-Daz broke the implicit deal by offering its own chunky flavors of ice cream, which it branded as "Extraas". Ben & Jerry's swiftly retaliated by introducing smooth flavors.  From a letter from Charles Lacey, the president of Ben & Jerry's, to shareholders in 1994:

"In late 1992, Häagen-Dazs introduced Exträas, a line of chunky flavors designed to compete with the great chunky flavors that have been so much a part of our success. In 1993, they promoted these flavors heavily with … deep price discounting … and this slowed our sales momentum significantly. We chose not to match their discounted prices. … Our long-term interests are best served by avoiding the pricing roller coaster that has weakened many other national brands. … We shifted the competition back to …product development. … We made our name with chunks. Now we intend to make a name for ourselves with Smooth, No Chunks! flavors."

Ben Cohen, one of the founders of Ben & Jerry's put his company's strategy more bluntly, saying, "when the smooth get crunchy, the crunchy get smooth."

Haagen-Daz backed off, and the ice cream brands went back to amicably splitting the high-quality ice cream market, colluding to keep prices high.